Few people would ever want to face the question, “should you file for bankruptcy?”, as getting out of debt can cause a lot of financial and emotional strain. If you’re struggling to pay back what you owe, whether that’s personal loans or credit cards, it is crucial that you look out for the key signs that you may have a debt problem.
If that’s the case, there are several steps you can take to get out of debt, including seeking the help of the best debt consolidation firms or the best debt settlement companies. However, this won’t be appropriate in all situations and you may need to file for Chapter 7 or Chapter 13 bankruptcy instead. Here’s what you need to know.
What is bankruptcy?
Bankruptcy is a legal proceeding in which your assets and liabilities are examined by a court. The court will then decide whether to discharge those debts so that you’re no longer legally required to pay them. Or the case could be dismissed if the court believes you have enough assets to pay the bills.
In Chapter 7 bankruptcy, certain assets are sold to pay off unsecured debts such as personal loans and credit cards. These assets can include real estate (not your primary residence), a second car and valuable collections such as coin and stamp collections.
In Chapter 13 bankruptcy, you can usually keep your possessions and instead, a more affordable repayment plan is set up with your creditors. This typically spans a three or five-year period and after this time, any remaining unsecured debt is discharged.
Chapter 11 bankruptcy, meanwhile, is usually for businesses. It gives them the opportunity to stay open while they restructure their debts and assets to repay creditors.
Reasons to file for bankruptcy
You might consider filing for bankruptcy if:
- You have explored other options, including attempting to negotiate with your creditors and establish a repayment plan. If your creditors have not been willing to agree to this, bankruptcy may be your only option.
- You simply cannot repay your debts. For instance, if the amount you need to pay each month exceeds your monthly income, making it impossible to clear the debt.
Filing for bankruptcy enables you to start fresh as most or all of your debts will be discharged or forgiven. This also means all phone calls and collection letters from your creditors will stop. However, be aware that some types of debts, including child support, some unpaid taxes, and most student loans, won’t be discharged in bankruptcy.
What are the consequences of bankruptcy?
The negative consequences of bankruptcy can be significant which is why it’s important to consider this option with care.
Your credit score will take a hit
If you have good credit, your score will drop if you file for bankruptcy. A Chapter 7 bankruptcy will remain on your credit report for up to 10 years, while a Chapter 13 bankruptcy will stay on your report for 7 years. During this time, you are unlikely to be able to get new lines of credit, or if you can, you’ll pay significantly higher rates of interest.
That said, if you already have poor credit, your credit report may improve over time if you manage your debt smartly and rebuild your finances. Some of the best credit repair services could help you restore your credit score, who can deal with creditors on your behalf and offer specialist advice.
You could even fix your credit score on your own.
Bankruptcy is a public record
As well as affecting your credit report, bankruptcy can also affect your personal life. Bankruptcy records are usually a matter of public record which means they can be looked up online. Because of this, bankruptcy can cause difficulties when you apply for a job or if you want to rent an apartment. Your insurance premiums are likely to increase too.
You can lose certain types of property
If you’re filing for Chapter 7 bankruptcy, many of your assets will be disposed of to pay your creditors. This could include a second home, cash, stocks, bonds, valuable collections or a second car. However, you will be allowed to keep certain assets, known as exempt property, including a portion of the equity in your home and car, and household goods.
How much does bankruptcy cost?
The cost of filing for bankruptcy is usually around $300. However, on top of the filing cost, you will also have to hire an attorney and this can cost considerably more.
Although you may be able to act on your own behalf without the help of an attorney, doing so is risky and it’s usually best to cover the additional cost. This could be anywhere between $500 and $3,000 if you’re filing for Chapter 7 bankruptcy, but more for Chapter 13 bankruptcy. Fees vary depending on where you live and the complexity of your case. If you can’t afford an attorney, you might be able to benefit from free legal services.
In addition, you will need to pay around $50 for credit counseling. Fee waivers and reduced rates are available depending on your household income.
How to file for bankruptcy
To start the bankruptcy process, a petition will need to be filed with the bankruptcy court. This can be filed by an individual, spouses together or by a corporation.
Before you do this, however, you will need to compile your financial records, listing all your debts, assets, income and expenses. This is important as one of the requirements of filing for bankruptcy is that you can demonstrate you are unable to repay your debts.
Another requirement is that you complete credit counseling with a government-approved credit counselor. Credit counselors can help you establish your financial situation, create a budget and explore alternatives to bankruptcy before you proceed. You must complete this step within 180 days before filing. If you don’t, your filing will be rejected.
At this point, you should hire an attorney if you haven’t already. You will then be ready to file your petition and once it’s accepted, your case will be assigned to a bankruptcy trustee who will set up a meeting with your creditors. You must attend this meeting, but your creditors do not have to.
Should I declare bankruptcy?
Bankruptcy won’t be the right option for everyone and if you’re considering it, it is vital that you fully understand the consequences it can have before proceeding. It is also well worth speaking to a reputable credit counselor to see whether you can negotiate with your creditors before you take the plunge in case you can avoid bankruptcy altogether.